The UK spend on betting has increased sevenfold since Gordon Brown’s cut on betting tax in 2001, with £59billion being spent last year alone9. According to research giant Forrester, 76% of the UK’s 29 million adult internet users admit to regularly placing a bet either online or offline10. This change in the UK’s wider betting habits cannot fail to have an impact on the spread betting industry as people look for new experiences beyond the traditional. In the UK the spread betting industry has been at the forefront of offering online trading and analysis tools, frequently stealing a march on traditional share trading services. The current market for spread betting is almost completely internet based and is in a similar market to other online trading accounts. The investors currently exploiting online betting sites usa are predominantly white, male, affluent internet users who are under 45 years old.11 Of course, this is not unexpected. The early adopters of all new technology applications are generally this same group, whether they are trading online, the first to buy books or home electronics online.
The needs of this group will change as it gets older. Pensioners currently only number 5% of the customer base, a figure that will grow. They are already being encouraged to worry about their insufficient pension pots and they will begin to structure more of their portfolios with a view to the long-term and managing risks to their capital. Finspreads, for example, has seen an average 15% year on year growth in the 55+ market since 2002. Successfully meeting the challenge of retaining existing customers will further change the age profile of the customer base. And this is without mentioning that the population at large is aging.
Current adverts for CFDs and spreads tend to revolve around macho objects of desire: glitz, cars, aeroplanes and the like. This will necessarily change for any longer term products that are offered to an older age market. Any products with longer expiries, perhaps measured in years, would compete at least indirectly with traditional brokers who do not aspire to the wheeling-dealing image.
An example of an exotic contract might be a security that pays interest, similar to a bond; however, this interest payment is instead determined by returns on an index of traded commodities; this interest payment will continue until the expiry of the contract unless one of five specified stocks rises 10% above its price at the start of the contact. It is perhaps clear (or unclear) from this example why these are described as exotic contracts.
The spread betting and CFD companies will therefore have to cater for these older customers in the future. However, this market segment known as “empty nesters, silver surfers’ are only one element of the potential market so far under-represented in the financial gambling arena. If, as expected, there will be an annual growth rate of between 20%12 and 26%13 in the number of spread bets and CFDs used by retail investors, that growth is unlikely to occur simply in existing segments of the market.
If these products are to be more widely used, logic dictates that the profiles of the investors must change. The challenge for the industry is to decide which other groups are going to be interested in spread betting or CFDs in future years. Also, will the industry be able to serve these groups without cannibalising their existing client base?
Traditionally women have been conspicuous by their absence in spread betting and CFDs. In recent years, however, this has been changing. Sandy Jadeja, Chief Market Analyst of Finspreads, has seen an increase in their numbers trading and attending his educational seminars, at first steadily, and then growing more rapidly; and this trend seems unlikely to reverse. Interestingly, Mr. Jadeja also notes that women have a different, more calculated, trading mentality. They tend to prepare their research more effectively and be more cautious. Sheila Gleason, Marketing Operations Director at Barclays Wealth Management, has noticed that Barclays’ own research shows that “women do about 40% more research than men on every trade”. Research from Digital Look shows the same result – women clearly outperform men when investing.
They also trade or game online less compulsively than men and are less likely to become addicted. Finspreads has seen a 10% year on year growth in female clients over the past 2 years, a figure fairly representative of the industry at large. Compared to when the company formed in 1999 they now have over 300 times the number of female customers. However, despite the growth in female spread-betters they are only in the region of about 10% of all account holders. This correlates with the percentage of women in the overall gambling population which is usually stated to be between 8%-12%. There is concern in the industry, therefore, that the rapid recent growth in female participation may have plateau-ed at the general level.
Contrary evidence is provided by online poker where there has been a dramatic increase in the numbers of women to somewhere in the region of 45% of punters. It is not entirely clear what has driven this increase – anonymity, challenge, complexity and hygiene have all been suggested as reasons. The spread betting industry will need to understand what drove this enormous rise in female participation and attempt to replicate it for spread betting. As mentioned before, while adverts for CFDs and spreads focus on the macho online gaming billboards have even included fluffy bunnies to appeal to the female consumer. Whatever it takes the spread betting industry must address it.
Ethnic minorities are also likely to be important sectors where growth might be expected in the retail derivatives industry. Although immigration is not new, growth in the United Kingdom population has been increasingly driven by immigration since the mid-1990s. Will the first wave of immigration from the new EU states settle and prosper here like past hard-working immigrants? Past immigration from the Indian subcontinent has developed into an affluent middle class. According to the Institute of Asian Professionals 10% of business startups are the brainchilds of Asian entrepreneurs, even though they make up only 5% of the UK population. Just as the Hispanic constituency in the United States is growing in importance for marketing a wide range of products, so too could British ethnic groups. Australia provides an interesting experiment in targeting ethnic groups. Australians with a far-eastern heritage are viewed as a specific market segment and Britain is certainly following suit.
Adrian Buthee of Two Way Trade, a CFD brokerage, points out that the British Asians already constitute a very noticeable group of traders, and certainly the largest ethnic minority group. It may be politically incorrect to characterise racial stereotypes but it would also be commercially incompetent to ignore ‘a priori’ evidence that suggests preferences for financial products based on ethnic background. It is important, therefore, to segment individual markets not only by age and gender but also by ethnic sub-groups if the evidence for so doing is strong.
The industry will also continue to seek out new international markets. Ireland and Australia are already important markets, but these are not incredibly different environments from the British market. In the far-east and the Indian subcontinent, however, there is a greater tendency to think of commodities such as gold as an investment. The Chinese are even planning to open a theme park entirely dedicated to the yellow metal.14 The £14 million (€20 million) park will allow visitors to watch gold being mined and processed. The more adventurous will even be able to mine gold for a day. For the more serious Chinese ‘gold-bug’, a special edition of the China Economic Daily was published in two gold versions. The more expensive issue cost each reader just over £4,500 (€6,600) to catch up on the news and used 500 grams of gold.
Per-capita income of China’s urban residents grew by 9.5 percent in the first half of last year. According to a report of the Gold Field Mineral Service, a metals consultancy, this income growth will lead to annual gold sales in China of 600 tons in five years.